A "third tier" of accounting firms is emerging to offer middle-market companies an alternative to the Big Four and other national firms, according to Inside Public Accounting's 14th Annual Analysis of Firms. The Third Tier firms will manifest an increasingly formidable competitive force for the national firms, as well as for small and mid-size local and regional firms, according to IPA research.
"IPA currently defines Third Tier firms as local and regional firms with $90 million to $349 million in net revenue," said Julie Lindy, editor. "Ten firms currently fall into our definition of Third Tier."
"The Third Tier enjoys $1.53 billion in net revenue, compared to $2.3 billion for the Second Tier -- that is, non-Big Four national firms such as Grant Thornton and BDO Seidman. The Second Tier's revenue grew 4.5% in FY03-04 -- respectable, perhaps, but puny compared to the Third Tier's 13.2%"
If current trends continue. Third Tier firms soon may overtake the Second Tier in revenue, Lindy projects. The largest Third Tier firm, Indianapolis-based Crowe Group, is within $82 million of overtaking BDO Seidman, and it already generates more revenue than either BDO or RSM McGladrey did a mere five years ago.
"Much of the Third Tier's revenue growth can be attributed to mergers, but it's also being fueled by work resulting from passage of the Sarbanes-Oxley Act of 2002, which -- among other provisions -- prohibits accounting firms from performing certain consulting engagements for publicly held audit clients," said Martha Sawyer, president of Hudson Sawyer, publisher of IPA.
Simple marketing strategy
The strategy of Third Tier firms is very simple:
* Compete effectively for middle-market clients by delivering better client service than the national firms do
* Provide strong niches
* Offer competitive pricing
* Feature a hearty menu of services.
These firms have become fierce competitors
for regional dominance and talent, and they tend to have long-term leaders who have entrepreneurial vision and the ability to execute their strategic plans, according to Lindy.
In some cases. Third Tier firms are growing beyond their home regions. For example, Reznick, Fedder & Silverman of Bethesda, Md., opened a West Coast office in Sacramento, Calif., this year, and Indianapolis-based Crowe Group has offices in Florida and New Jersey.
The power of the Third Tier puts the squeeze on local firms and smaller regionals as well as on the national firms. With their deep pockets, diverse specialties and a wide range of expertise, they're formidable competitors to smaller firms with more constraints on their resources. Several such firms already have decided to join 'em since they can't beat 'em -- at least not often enough -- and many more will do so in the future: Third Tier firms aren't shy about making deals with other accounting firms.
The challenge for Third Tier firms will be to stay on course. Many a firm has been doomed by its own ambition and its own growth. To maintain their competitive advantage. Third Tier firms must maintain their regional dominance, their tradition of steady leadership and avoid the bureaucracies and ethical missteps that have plagued the national firms.
Inside Public Accounting, founded in 1987, is published by Hudson Sawyer in Atlanta, GA. It reports and analyzes the news, trends, strategies and politics that affect the nation's public accounting firms, providing them with the information and resources they need to compete and operate more profitably. You can reach Julie Lindy at firstname.lastname@example.org, and at (404) 264-9977.